Fannie Mae sending $10.2 billion to taxpayers as profit swells

By Margaret Chadbourn

WASHINGTON (Reuters) - Fannie Mae <FNMA.OB>, the largest U.S. mortgage finance company, said on Thursday its second-quarter profit nearly doubled to $10.1 billion, triggering another big payment to the U.S. Treasury that could complicate the debate over revamping Fannie and its smaller sibling, Freddie Mac.

The quarterly profit was Fannie's sixth in a row, mainly driven by a housing recovery that has reduced mortgage delinquencies and lifted home prices. The government rescued Fannie Mae and Freddie Mac <FMCC.OB> in 2008, covering losses on soured loans. Since then, taxpayers have bailed out the pair to the tune of nearly $188 billion.

Fannie Mae said it will make a $10.2 billion dividend payment in September to the U.S. Treasury for its rescue aid. After that payment, which comes on the heels of nearly $60 billion Fannie sent to the government last quarter, it will have paid about $105 billion in dividends to the Treasury, roughly 90 percent of the $117.1 billion it received in taxpayer assistance.

Meanwhile, Freddie Mac, which on Wednesday reported its second-largest profit ever, $5 billion, will be sending Treasury a $4.4 billion check next month. That will bring its running total to about $41 billion, or close to 60 percent of the $71 billion in bailout funds provided to Freddie.

Under the terms of the bailout agreement, both mortgage companies are only allowed to hold $3 billion in net worth and all profit in excess of that goes back to taxpayers.

Moreover, none of the dividend payments goes toward repaying the $188 billion in rescue funds, which were provided by the government and gave it a controlling stake in the form of preferred shares. Neither company has the option of buying back the stakes, which is one of the big questions regarding their future.

For the second quarter, Fannie Mae's profit rose 97 percent to $10.1 billion from $5.1 billion the year before. It was down, however, from the first quarter's record $58.7 billion, which was largely the result of an accounting gain from the recognition of more than $50 billion in deferred tax assets.

President Barack Obama on August 6 said he wants to wind down Fannie Mae and Freddie Mac and reduce the government's share of the mortgage market. The government currently backs about 90 percent of the market.

"Any reform of the housing finance system will take a number of years to achieve. We would expect to continue to be focused on returning as much value to taxpayers in the meantime," said Fannie Mae Chief Executive Officer Timothy Mayopoulos.

Mayopoulos said that Fannie and Freddie's profitability should not "slow the debate" on how to reshape the mortgage finance system.

Analysts, however, worry the sudden surge in profitability for the two will obscure the reform debate.

"The problem is these fresh net income gains could well steer ... reform down the wrong path," Jim Vogel, an interest rate strategist at FTN Financial in Memphis, Tennessee, said in a research note following Fannie's earnings.

Fannie Mae and Freddie Mac do not make loans but instead buy them from lenders and package them as bonds, and guarantee them against default. A key part of the housing system, the two own or back about half of all U.S. home loans.

Their collective remittances are also helping to lower the budget deficit and are one factor behind expectations that the United States will not exhaust its statutory borrowing authority until this fall, months later than originally forecast.

The trend of strong financial results at the firms has also attracted the attention of investors, mainly hedge funds, that have poured into both the common and preferred stock of Fannie Mae and Freddie Mac in the hope that the companies will eventually be able to buy their way out of government control.

A bipartisan group of senators recently introduced a bill that is in line with Obama's plans to reform the housing finance system. The plan would abolish Fannie and Freddie and replace them with a new "public guarantor." The bill would maintain a federal role in the market.

An alternative bill in the House of Representatives, backed by Republicans, would virtually privatize the mortgage market.